FINANCE: Labor super rort could bankrupt retirees

by Jeffry Babb

News Weekly, July 7, 2012

There’s a risk that a major industry super fund will get into trouble, potentially bankrupting a whole generation of retirees, Louise Staley, the Institute of Public Affairs superannuation expert, told the H.R. Nicholls Society’s recent AGM in Melbourne.

The industry superannuation fund movement, launched in 1985, was one of the most brilliant political masterstrokes of the Hawke-Keating Labor governments.

In August 2011, Bill Shorten, when he was Minister for Financial Services and Superannuation and Minister for Employment Relations, told the Association of Superannuation Funds of Australia (ASFA) Superannuation Guarantee Dinner: “The first move towards universal access under the superannuation provisions came as part of the Hawke government’s Accord with the Australian Council of Trade Unions.

“Government and unions agreed that the profit share in the economy had to be restored to reignite private investment. At the time, unemployment and inflation were hovering around 10 per cent. In return for this restraint the government supported the ACTU’s claim that three percentage points of wages should be contributed by employers to a superannuation account in the name of each worker.”

The superannuation guarantee charge was to go into an industry superannuation fund. The fund was to be administered by a board made up of worker representatives (i.e., unions) and employer representatives. Because the union representatives are far more adept at caucusing to establish their position, the employer directors are no match for them when it comes to running these funds.

This of course puts the union movement in a position of immense power and influence. The super sector is now worth $1.4 trillion and will grow to $4.5 trillion by 2020.

Exactly where each worker’s super contributions will end up is in theory the choice of the worker, but is in fact is in the hands of the unions. According to legislation, the Superannuation Legislation Amended (Choice of Superannuation Fund) Act 2005 established that individual employees generally have the opportunity to choose their own superannuation fund.

But — and this is a big but — if an employee does not choose a superannuation fund, the superannuation fund nominated in the employee’s award will apply. The superannuation fund in the award is nominated by Fair Work Australia, usually on the advice of the union advocates.

Fair Work Australia officials freely admit that their expertise is industrial relations, not financial management, and that they are somewhat at sea when it comes to selecting appropriate superannuation funds. What’s more, once the superannuation fund has been nominated, the nomination is virtually impossible to reverse, even by the Federal Government.

Of course, in theory the worker can select his or her own superannuation fund, but this is an unrealistic expectation for a worker who has, on the whole, a lack of financial education. He or she is far more likely to accept the fund that is jointly recommended by his or her union and employer.

Most workers aren’t aware that, unlike public sector employees on defined benefit superannuation plans, who are paid a proportion of their final salary adjusted for inflation until they expire, their superannuation is not guaranteed by the taxpayer.

If they are unlucky enough to be in an industry fund that goes bust, they will lose their retirement savings. This is not beyond the bounds of possibility. In fact, it is more than likely to occur. The Motor Trades Association of Australia (MTAA) Super fund, said to be one of the best performing super funds, almost collapsed like a house of cards following the global financial crisis.

The real rort is that the industry super funds, supported by their mates in the Gillard government, are refusing to accept governance standards that apply to other financial institutions. Many union-appointed directors have no qualifications at all in financial management. Many — indeed most — have never attempted to gain these qualifications.

According to the Australian Prudential Regulation Authority (APRA), which oversees standards of governance in the Australian financial sector, independent trustees could bring useful skills to super fund boards and reduce the potential for conflicts of interest to emerge.

“My view is that having independents is a plus,” said APRA deputy chairman Ross Jones (Australian Financial Review, June 18, 2012).

Banks and insurance companies, unlike super funds, are required by APRA to have independent directors on their boards. Superannuation Minister Bill Shorten has rejected a proposal contained in a national review of the super sector that one-third of trustees on industry fund boards be independent, leaving the other two-thirds to unions and employer groups.

It’s clear that Shorten is looking after the interests of his union mates. Super fund reporting standards are poor, governance is opaque and no-one knows who is getting what.

Unions have sued industry super board members to hand back their directors’ fees to the unions. Investment returns are lagging due to the worldwide downturn, and most Australian funds are very highly exposed by international standards to the stock market, which has performed poorly.

Let’s fix this rort before we have a generation of retirees reduced to poverty.